private equity. history of pe american research and development corporation (1946) investment in...

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Private Equity

History of PE

American Research and Development Corporation (1946)

Investment in Digital Equipment

Annualized return on capital of 101%

$70,000 > $355 Million

Panic of 1893

US relied heavily on high commodity prices

Argentina – failure of wheat (1890)

Run on gold

Railroad overextension

Union Pacific

Badly run railroad

Cheaply built with corrupt officials

E.H. Harriman (with the help of Kuhn Loeb)

Converted to cash cow

First Leveraged Buyout

1901 JP Morgan & Co.

Bought out Carnegie Steel for $480 Million (This would be equivalent to $15 Billion in today’s dollars)

New company Capital = $1.4 Billion

US Government Spending = $524 Million

Fun Fact: Carnegie + Rockefeller + Vanderbilt = > $1Trillion in net worth

Glass Steagall Act

1933 – In the wake of Great Depression and bank failure

Separated Investment and Commercial Banking

Kept large banks out of PE space

Only smaller deals

Kohlberg Kravis Roberts

Known today as KKR

Created in 1978

Partners from Bear Sterns

Smaller/family deals

Gibson Greeting

Producer of greeting cards

$80 Million of which $1 Million was cash

One investor (William E. Simmon) made $66 Million

Caught attention of others

RJR Nabisco

Culmination of 80’s boom

KKR acquired RJR for $31.1 Billion

Deal eventually went bust

Trend arose of failed LBOs

PE industry went quiet

Second Boom

1993-2003

New degree of respectability and legitimacy

Companies focused on attractive deals

What is Private Equity?

Equity capital not quoted on public exchange

Two paths Directly into private companies Buyout of public company (delisting)

Raising Funds

Retail and institutional investors

Four uses for cash R&D in existing company Expand working capital Making acquisitions Strengthening balance sheet

Layout

Types of Funds

LBO

Venture Capital

Growth Equity

Fund of Funds

Mezzanine Capital

Distressed PE

Secondaries

LBO – Leveraged Buyout Fund

Investor + Borrowed

Financial Leverage

Majority Position

Controls firm’s strategy

LBO

Usually 90% debt to 10% equity

Collateral Component

Hostile Takeover

Risk – who goes bankrupt?

Venture Capital

Money provided to startup firms

Significant long-term growth potential

High risk

Above average returns

When does the money come?

Growth Equity

Mature companies

No future capital requirements

Minority stake

Company with little debt

Invest at inflection point

Fund of Funds

Fund doesn’t invest in companies directly

Buys into portfolio of other PE firms

Allows for greater diversification

Fee charged (Professional portfolio management)

Mezzanine Capital

Halfway between debt and equity

Subordinated notes

Preferred stock

Hybrid financing

Higher returns than debt, lower risk than equity

Mezzanine Financing

Distressed PE

Serious financial difficulty

Funds can buy shares cheaply

Restructuring

Breakdown of Distressed PE

Secondaries

Buy commitments from PE

Turn a profit on positions

Sometimes buy companies or assets from PE firms

Industry Analysis

PE firms boom and bust (Cyclical) Why?

Debt

Marco-economic trends

Short on capital

Fully Saturated Industry

Relative Size of PE

Deal Value & CAGR

Capital Raised by PE

Buyout-Backed Exits

Last year’s data

Exits by Investment Length

PE Life Cycle

Next Week

Come in with an investment idea

You will be pitching your stock to the group

You can use a PPT to present

We will be tracking these over the next quarter

Thank you!